California Governor Gavin Newsom Predicted Massive Budget Shortfall for California: Analysis Finds Reality Even Worse

The budget deficit in California may be billions of dollars bigger than the already massive number predicted by Democrat Governor Gavin Newsom, raising concerns about the fiscal future of the Golden State. 

Last month, the governor announced that California faces a predicted budget deficit of $22.5 billion for the upcoming fiscal year. The figure represents a massive downturn from last year when the state had a surplus of around $100 billion because of the surging capital gains and federal Covid relief. While the projected year-to-year drop-off seemed huge, it may not have been big enough. 

The California Legislative Analyst’s Office (LAO) is a government agency that analyzes the budget for the state legislature. The report, published last week, estimates that Governor Newsom’s forecast undershot the mark by around $7 billion, thanks to almost $10 billion less than expected in tax revenues. 

“In particular, using recent revenue collections and economic data, we estimate there is a two-in-three chance that state revenues will be lower than the governor’s budget estimates for 2022-23 and 2023-24,” wrote the state legislature’s budget analyst, Gabe Patek. “Our best estimate is that revenues for these two years will be roughly $10 billion lower — implying a larger budget problem by about $7 billion.”

State revenues are already significantly lower this year than last

Revenues from taxes are already much less this year than the previous one. Last month, California’s monthly tax revenue was around $14 billion lower than during the same month in 2022. Meanwhile, tax revenue in the current fiscal year, which began in July, is roughly $23 billion lower than in the prior year, according to a report by the Wall Street Journal. 

That’s despite California having the highest income tax rate of all states at 13.3%. In fact, the top 0.5% of taxpayers pay 40% of the state’s income tax, according to the most recent figures. 

In a recent interview with California Public Radio, H.D. Palmer of the California Department of Finance said that in 2020, 1% of the total sum of income tax returns filed were accountable for more than 49% of all personal income tax paid during the year. 

Additionally, capital gains are being affected. Another potential issue harming tax revenue could be the exodus of California residents to other states, specifically wealthy Californians who pay more significant taxes.

Nevertheless, tax revenues are higher than their historical averages, according to the LAO.

“While revenues are moderating from the recent peak, they are still above average historical levels,” wrote Patek. “Even after adjusting for inflation, anticipated revenues for 2023-24 remain about 20% higher than before the pandemic.”

Patek also indicated that “spending remains above historically recent peaks “and explained that it’s unlikely that tax revenues will be high enough over the next few years to afford California’s projected spending levels.”

Governor Newsom is preparing to release a revised budget in May, which is predicted to be substantially different from last May’s version that projected a $97.5 billion surplus.